Saturday, February 23, 2008
Ooh, Bankers Lobbying Congress
A brief summary:
- BofA will buy the Congress Critters. It is an election year and money is tight, so it will get them at a deep discount.
- The Congress Critters will pass a law saying that the Federal Government (that's you) will buy bad mortgage loans at a "deep discount".
- Then the Federal Government will write the loans down to where the people can afford to pay them (you will pay the unaffordable excess of their mortgage balances.) Don't forget to keep paying on your own mortgage while you are paying theirs!
- The borrowers will keep their homes, but now they will owe less because you will have paid it off to where they can afford it.
- The federal government (that's you!) will now guarantee the loans so they can be sold back to the banks at FMV. If the new loans go bad, the federal government (that's you!) will pay the noteholders off. If they perform, the noteholders (not you) will get the profit.
- It seems unlikely that the original deep discount will actually be the appropriate discount. First, there is no government agency that has the staff to determine what the actual secured value of these mortgages now are. Therefore it seems that the entities selling the bad mortgage loans to the federal government (that's you) will determine what the appropriate "deep discount" will be.
- Since the bad loans are concentrated in high LTV, stated/low-doc mortgages, there is no way to know what they can really pay. Thus the government guarantee is the real meat of this proposal. You will guarantee the banks and their shareholders to pay off their bad mortgages.
If the American public is willing to let Congress do this, the American public deserves what it is going to get. Remember, it is an election year. Congress Critters are cheap for businesses, but only human beings vote.
My alternate proposal is that we let the current creditors and banks write down these mortgages, and that when the banks fail we pay off the depositors, and then inject money into the system as needed by giving reserve and necessary capital to the most viable banks. In exchange, the federal government (that's you) will take a partial ownership position (stock) in the banks. That ownership position should be put into a fund that is assigned to pay all its profits to the SS/Medicare trust funds. Believe me; whatever money we get out of it we will need later to pay these benefits.
My proposal has the following benefits:
- It is cheaper. For one thing, we don't have to cover the cost of purchasing the Congress Critters.
- Banks and other creditors will take the first round of losses, so they will have a high incentive to correct bad lending practices and work out loans. They have the expertise to do this. A chunk of the costs will be paid by private interests, which will save you money.
- You are going to be paying for the excess deposit insurance payouts anyway.
- The money you invest to keep the banking system running will eventually come back to you when you most need it.
- We will recognize the losses now, thus correcting the market and destroying debt.
- There is no need to set up another big government agency, which will save you money right off the bat.
- You will get the banking stock cheap and eventually it will be worth more. Remember, buy low, sell high. The bank proposal is for you to buy high and sell low back to them, plus pay any future losses.
- My proposal would be infinitely better for the economy. The debt overhang is what will drag the economy down for years to come. The only way out is to destroy the bad debt ASAP. So under my proposal, you will enjoy years of higher GDP and lower taxes in about a decade. The deflationary impact will be short and relatively painful, but the lower inflation associated with it will be far better for the average American for many years.
We can inflate like Argentina or accept some temporary deflation. There's no alternative between the two.
The only thing the other plan does is shift losses from the banks and financial shareholders to the taxpayer.
CF is right. They won't get a piece of the action in my plan. I think that's a benefit.
Anon - Very funny.
Their plan is more deflationary than mine.
I haven't seen a discussion of this yet but ,IMO, the US has entered into a negative sum economy where the various classes will fight over an ever shrinking pie. Actually we have probably been in this condition for a decade but massive debt increases papered over the situation.
But not anymore and it is not going to be pretty. The ruling class has considerable assets to protect their privlege and will fight tooth and nail. We are at a tipping point and the destination is a much smaller middle class.
Hate to be negative but the world cannot afford the current American middle class and similar ones in China, India, and other emerging economies.
If we are at peak oil, then the global economy is approaching negative sum with associated commodity wars. Iraq may be seen as the first oil war.
Have a good weekend.
How about the government gets warrants or preferred stock, something that doesn't have voting rights? Also require any banks bailed out under this provision to meet certain provisions in terms of insider stock purchases, to ensure skin in the game.
with your permission i would like to email your excellent post to the WSJ. your ideas need to become mainstream.
It seems to me that we are seeing a vast and overweening arrogance in play here.
How about members of the FHLB on the boards as a rotating panel? I understand your concerns, but what has led to the current crisis is the lethal practice of managing financials quarter by quarter, which dumped large chunks of bonus money into the pockets of individuals who were running these institutions right into the ground.
This time we're doing it by destroying capital, and that's a more lasting condition. It changes the zeitgeist; the government can't make investors make loans they don't want to make, and they can't make people borrow who don't want to borrow.
I also don't think it's wise for government to own equity positions long-term; once the government has a direct financial stake in picking winners and losers in the market, watch out!
Final thought: last time we had deflation here, it took destroying and rebuilding the infrastructure of Europe and Japan to produce enough demand to pull the economy out of depression. I sincerely hope we're not going to use that method to get out of this round.
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